Mighty Seven-Eleven racing toward a cliff?

Stakeholders say business model needs rethinking

Like many people in Japan, Erwin Dwight Paler visits convenience stores for a variety of reasons — to buy coffee perhaps, or to withdraw money from an ATM, or just to pick up snacks and various daily necessities.

“Because it’s 24 hours a day, people are so used to having them around,” said Paler, a Philippine national of Japanese descent who like many of the roughly 127 million people in Japan embrace the “convenience culture” derived from 43,000 such stores.

But stakeholders are urging Seven-Eleven Japan Co., the nation’s largest convenience store chain, to rethink its business model so it can survive the tough retail competition spawned by the global economic slump.

“In many aspects such as prices, Japan’s convenience store industry is facing a turning point,” said Toshio Takahashi, a senior analyst in charge of the retail sector at Mizuho Securities Co.

Since opening its first store in Japan in 1974, Seven-Eleven has built an empire stretching to 12,349 outlets nationwide. It posted record-high sales and operating profit in the year that ended in February.

But Takahashi warned that Seven-Eleven and its rivals cannot evade the price war among retailers.

“I can see no (future) growth for the entire convenience store industry unless it sells products at bargain prices and lures housewives away from supermarkets,” he said.

Talk of lowering the prices of convenience store products surfaced in the wake of the Fair Trade Commission’s June 22 order for Seven-Eleven to stop the practice of unfairly banning its franchise stores from selling boxed lunches and other food products close to their expiration dates at discount prices.

Industry watchers say Seven-Eleven does recognize the need to reinvent itself to survive the tough competition amid the emergence of 24-hour, price-cutting supermarkets and the chain of ¥100 shops operated by rival Lawson Inc. that mainly sell food, including vegetables and fruit.

Seven-Eleven has tried to reach out to customers tightening their purse strings by offering lower-priced products, and not only in one-off campaigns, spokesman Nobuyuki Miyaji said. He was referring to moves this year to promote lower-priced private brands of daily commodities, including shampoo and detergent, released by parent Seven & I Holdings Co.

“People usually see convenience stores as offering products at fixed prices, and while that is the case, we are also looking at the needs of our cost-conscious customers — hence our policy of lowering prices,” Miyaji said.

But at the same time, Seven-Eleven remains cautious about simply lowering prices out of fear of becoming embroiled in a retail price competition, which could dent its profits. Seven-Eleven therefore said it will shoulder 15 percent of the cost of unsold items such as boxed lunches, becoming the first in the industry to do so, allegedly in an effort to prevent outlets from having the freedom to lower prices on their own.

But Toshiro Masuda, who has owned the Seven-Eleven Hachioji Minamiguchi store in Hachioji, western Tokyo, for about 30 years, dismissed this as a ploy to divert media and public attention from the real issue.

“The point is, the business model in which one could buy the same item at the same price at all convenience stores round the clock is outdated in our ecology-conscious time,” said Masuda, 60, who has been harassed by Seven-Eleven staff supervising his store, including threats that his contract wouldn’t be renewed.

“The system now is to throw away food still edible and use electricity for a 24-hour operation even in less populated rural areas where it is unnecessary, and this is foolish,” he said.

While their contracts state that the stores can freely determine the prices of products, owners say Seven-Eleven effectively demands that stores sell the products at its “recommended prices” and capitalizes on its dominant market position — a claim the company denies.

Mizuho Securities’ Takahashi said the case has led to a re-examination of current expensive prices of boxed meals and the headquarters’ excessive management over food quality.

“The owners protesting are those who are highly competent and experienced in the retail business because it takes great skills to manage prices, and what the headquarters needed to do was to respond to what these owners were seeking,” he said.

As a result, Masuda and other owners began championing the cause of reforms in the company’s franchise management style that is largely in favor of the parent operator.

On past losses incurred because Seven-Eleven refused to allow bargain sales, some have sought advice from legal experts like Masanori Nakamura, who said five people have consulted him and at least one is sure to sue the firm.

But whether the victims, emboldened by the FTC order, will take their cases to court is uncertain, as they may fear angering Seven-Eleven, Nakamura said.